The Stock Market

Today’s stock market, business cycles, and debt cycles are taken for granted. People just expect a recession every decade with consistent growth between recessions. This doesn’t make sense today, and it won’t in a Bitcoin world.

Currently, we live under a financial system where the currency devalues consistently and the most stable assets: treasuries, bonds, stocks, are all pyramided, with yields also declining. The US admits to a 2% inflation rate, but this number is dubious. It is likely higher, especially for middle and lower class families. Rational people recognize this, consciously or subconsciously, and make the rational choice.

They flee into riskier assets at rates that would otherwise be deemed reckless. Most of this risk-taking involves investment in stock — either directly or through mutual funds etc.. This abnormally high flow of capital into the stock market (among other investment methods) consistently pushes prices up, inflating asset prices above normal inflation rates. Citizens recognize inflation of their savings as harmful, but are willing to believe that the constant rise of stock prices is different, that it is based on improving technology, or an expanding economy, or that the stock market is just a source of wealth.

While this trend is certainly harmful and exacerbates business cycles and stock market bubbles, it is also the rational choice for millions of ordinary citizens who have nowhere safer to store their wealth. When there’s no stable option, riskier options are better than assured losses.

So, how would this situation be different under a hard currency such as Bitcoin?

If Bitcoin succeeds as a currency, it will experience constant and ever-growing demand. Because of its 21 million cap (and small rates of dust and loss), this will result in a money that constantly appreciates in value. The returns to hiding your savings under your mattress will go from negative to positive. If people feel safe sitting on their wealth, knowing it will only appreciate as they age, the pressure to invest in stocks and other financial instruments will decline (by how much, we can only guess). The average person, who knows little to nothing about stock markets, will no longer feel forced to take blind guesses or pay a suit to make guesses for them. Price inflation will slow or cease.

Speculators, investors, and the rich would, in all likelihood, continue to dabble in the stock market due to their risk tolerance (or just for fun), but much of the rampant speculation would end. Because of this, we may see a shift in which companies IPO and when. Today, young companies cannot risk an IPO because of volatility, cost, and potentially negative publicity. Larger companies IPO and receieve exorbitant evaluations and floods of liquidity. If going public were less risky, smaller companies might do it more often, changing the startup/VC dynamic.

Will this mitigate boom-bust cycles? I’m inclined to say yes. Central banks, which currently determine interest and inflation rates, would have a hard time doing so without control over the supply of money. Similarly, an FDIC program or TARP bill would have a hard time functioning without Quantitative Easing (which requires vast expansion of the money supply [M1]). For this reason, it is likely that interest rates would float (see my post on Interest Rates) and vary across regions, industries, and businesses. Instead of a single crash, businesses (including banks) would take fewer risks (loans) and fail at slower speeds and different points. For banks, loans would be far harder to justify when just hodling the money gives steady returns.

A Keynesian (read: Paul Krugman) would retort that this constriction of the supply of cheap credit might throttle the economy and trigger a deflationary spiral. Their first claim would be correct, but overexagerated. Their second is nonsense. The economy might not see the rapid “growth” that we experience today, but the growth we would see would be less contrived and more permanent. Economic downturns would be similarly muted. In a future article, I will discuss deflationary systems and their superiority over inflationary ones.